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In most cases, once a margin call closes your open trading position, the margin left in your account is freed up and becomes available to open new positions. However, it’s essential to know that both gains and losses are magnified when you trade with leverage. In the worst-case scenario, you could even lose more money than the initial $1,000 you put up to open the trade. Thus, a stop-loss of 30 pips could represent a potential loss of $30 for a single mini lot, $300 for 10 mini lots, and $3,000 for 100 mini lots.

We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey. It is vital to avoid mistakes with forex white label looking into the options costs and requirements leverage; to understand how to avoid other issues traders might face check our Top Trading Lessons guide. In forex jargon, the market “gaps” when the price of a given currency pair abruptly moves up or down with little trading occurring in between.

  1. Your broker then covers the remaining balance to give you full exposure to the market you’re trading.
  2. Though beginners can benefit from the use of a standalone online leverage calculator, most forex traders use the tools that are available directly within their broker’s trading platform.
  3. Assuming the rate moved favorably, the trader would unwind the position a few hours later by selling the same amount of EUR/USD back to the broker using the bid price.
  4. We’re also a community of traders that support each other on our daily trading journey.
  5. That said, some events – such as market gaps – can put your entire balance at risk.

This is because the market can move against your trade, bringing your account equity below an acceptable level (determined by your broker). When this happens, you’ll receive a margin call or be closed out of your position due to insufficient funds. Leverage enables you to increase your market exposure beyond your initial investment (known as margin). You can think of the margin as a deposit your broker requires from you to trade a certain product.

How Leverage Works in the Forex Market

The more margin that’s required on a trade, the less leverage you’ll be able to use. This is because you’ll have to fund a higher percentage of the full value of the trade with your own money and ‘borrow’ less from your broker. This exercise highlights the basics of how forex leverage is used when entering a trade.

Using margin in forex trading

You can think of this like putting down a 10% deposit on a house; you gain access to the entire house after funding only 10% of its full value. Leveraged trading can be risky as losses may exceed your initial outlay, but there are risk-management tools that you can use to reduce your potential loss. Attaching a stop-loss to your position can restrict your losses if a price moves against you. However, markets move quickly and certain conditions may result in your stop not being triggered at the price you’ve set. Leverage is a facility that enables you to get a much larger exposure to the market you’re trading than the amount you deposited to open the trade.

Leverage can be described as a two-edged sword, providing both positive and negative outcomes for forex traders. We recommend that you seek independent advice and ensure you fully understand the risks involved before trading. When researching leveraged trading providers you might come across higher leverage ratios, but using excessive leverage can have a negative impact on your positions.

Some traders might use leverage in order to minimize the amount of their margin balance used for a given trade. Other forex traders might use their entire margin balance to maximize the size of their trade and, hopefully, greatly increase their profit potential. Unless you are an experienced forex trader, excess leverage is unsustainable and will likely lead to losses. But it must be stressed that leverage can amplify your potential profits and your potential losses.

Based on the margin required by your broker, you can calculate the maximum leverage you can wield with your trading account. When trading forex, your ability to use a margin account is the same whether you go long or short to open a trade. When trading stocks, there are different rules that govern the use of margin accounts when opening short positions. Trades or open positions are closed (or liquidated) in order to prevent your account balance from going into the negative.

However, you’ll need more than just the initial margin to maintain your position in the market. If a margin call occurs, your broker will ask you to deposit more money in your account. If you don’t, some or all open positions will be closed by the broker at the market price.

The importance of using stop-loss orders in forex

To avoid a catastrophe, forex traders usually implement a strict trading style that includes the use of stop-loss orders to control potential losses. A stop-loss is a trade order with the broker to exit a position at a certain price level. Many people are attracted to forex trading due to the amount of leverage that brokers provide. Leverage allows traders to gain more exposure in financial markets than what they are required to pay for. Traders of all levels should have a solid grasp of what forex leverage is and how to use it responsibly.

If GBP/USD rose 20 pips, you would still make the same profit of $200, but at a considerably reduced cost. Here, you’d only have to pay 10% of your $100,000 exposure to open the position. Steven previously served as an Editor for Finance Magnates, where he authored over 1,000 published articles about the online finance industry.

More Forex Guides

If an investor wants to go long or buy a currency, they would be quoted the ask price, and when they want to sell the currency, they would be quoted the bid price. Leverage enables you to gain more exposure in financial markets than what you’re required to pay for trading them. Leverage ratio is a measurement of your trade’s total exposure compared to its margin requirement.

Unforeseeable events in the market can sometimes cause large, rapid movements in exchange rates. Even small swings in an exchange rate can swiftly turn into significant losses. For example, if you wanted to open a position worth $10,000 of currency, and the broker has a 10% margin requirement, you’d only need to put up $1,000 to gain full exposure to the trade size.